Tata Motors - JLR stays on course, management takes steps to rev up domestic ops; maintain Buy - Centrum

We recently interacted with the management of Tata Motors (TAMO) for an update on JLR and domestic operations. The management did not foresee any adverse impact of the new China fuel norms as recent launches comply fully and all future products expected by FY15 will also meet the norms. It indicated a strong product pipeline for JLR over FY14-FY16 and maintained its overall capex guidance of £2.75bn annually (~£1bn towards R&D). On the domestic side, while the M&HCV segment continued to remain challenging, the LCV/SCV outlook is still strong. On the PV side, the company has been able to significantly rationalize inventory levels at dealers' end and the focus is now on strengthening the after sales service (In our interaction PV customers highlighted significant improvement). While the JLR operations are on course, the company is taking efforts to rev up its domestic operations. We maintain Buy rating on the stock.

Key takeaways:

No adverse impact of new China fuel norms: China recently approved average fuel-consumption regulations for passenger cars through 2020, with the target of 6.9 L/100 km in 2015 and 5.0 L/100 km in 2020 compared to the current 7.8 L/100 km. The management indicated that all luxury car majors including JLR were anticipating the change and OEMs have been working to meet them. The management does not foresee any adverse impact of the Chinese move as new model launches complied with the norms and future products expected by FY15 will also meet them.

Strong product pipeline to support growth, a lot done in FY13, more to come over FY15E-FY16E: The management indicted a strong product pipeline for both Jaguar and Land Rover over for FY15-FY16. Within the Jaguar portfolio, the company in FY13 launched a smaller engine XJ and XF in China, AWD XJ and XF in the US and XF Sportbrake in Europe. Further, dispatches of F-Type started in April 2013. It recently showcased XKR and XJR at the New York Auto show and a small Jaguar is likely to be launched by FY16. In the Land Rover portfolio, the dispatch of new Range Rover Sport is likely to start from August '13; the new Freelander is expected by FY15 and an all Aluminum Discovery is slated for launch in FY15. We believe that a strong product pipeline coupled with model refreshes will continue to drive JLR volume growth going ahead.

...Change in norms and new launches unlikely to increase capex further: JLR has already upped its annual capex guidance to £2.75bn. The management indicated that there would be no further capex as the revised capex guidance took care of the anticipated change in norms and will also support the introduction of eight new or refreshed products during the year. The engine facility in UK with expected capex of £500mn and capacity of 200k p.a is likely to be ready by FY14 and is expected to start production by FY15.

Update on standalone business: The M&HCV business continues to remain challenging. TAMO's market share in the domestic M&HCV goods segment stood at 57% compared to 62% in FY12 and the management attributed this market share loss largely to 1.) Lower discounting compared to peers (based on our recent interaction TAMO's discounts in M&HCV segment on average was Rs.50-60k/vehicle vs. Rs.100-Rs.120 for peers) 2.) Significant market share loss in the 7.5T-12T segment. Competitors have gained higher market share in this segment due to aggressive discounting and 3.) Replacement demand moving towards <12T vehicles due to weak demand. The LCV/SCV segment continued to remain strong and the company is adding capacity at its Dharuhera plant to meet the strong demand. On the PV side, the company is taking efforts to review its Passenger Vehicle business and the focus in on strengthening the after sales service (in our interaction TAMO PV customers highlighted significant improvement in after sales support). The CNG and Diesel variants of Nano are likely to be launched in FY14E. The company has also taken steps to rationalize inventory at the dealer's end and this has helped curtail inventory to little over 1 month compared to 2 months.

Valuations and Recommendation: At the CMP of Rs271, the stock is currently trading at 6.9x FY14E consolidated EPS of Rs39.2 and 6.2x FY15E consolidated EPS of Rs43.4. We continue to be positive on the stock and maintain Buy rating with a target price of Rs.329 (based on SOTP of Rs.23 for standalone operations, Rs.25 for subsidiaries (excluding JLR) and Rs.282 for JLR on September 2014E).

Source : Equity Bulls

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